Analysis

Our goal throughout this report has been to present a factual and even-handed view of China’s foray into the world of social credit. But these facts raise as many questions as they answer. For example, what immediately obvious impacts will the SCS have on Chinese society and business environment? What flaws exist in the system itself? What’s the Chinese government’s endgame? And what are the biggest implications for companies doing business in China?

Social Issues

The potential for human rights abuse exists

Let’s dive in and address the elephant in the room.

In the course of our research, we have found no credible evidence that the SCS is aimed directly at mandating political conformity or silencing dissent. However, at its most fundamental level, the SCS is an extremely powerful extra-legal enforcement tool in the hands of the Chinese state, and we would be remiss not to mention that it very easily could be put to more sinister uses in the future.

Fully realized, the social credit system will provide the government with vast amounts of systematized data, allowing the Party to put together detailed personal profiles of more than 1 billion Chinese citizens.

Coopting technology to enforce political orthodoxy would also not be out of character for the Chinese Communist Party. Beijing has shut off access to huge swaths of the internet and replaced it with a homegrown information ecosystem that allows it to monitor its citizens and control online political discourse. The techno-surveillance state that has been created in Xinjiang, complete with the collection of biometric data from its residents, is a particularly chilling warning.

With all this in mind, it’s not at all difficult to envision a future where ordinary people receive black marks on their credit record for sending a sensitive text message or communicating with “politically unreliable persons” or conversely, get a bump for sharing an article from state media.

But at the moment, that is not happening.

Artificial creation of “trust”

From the earliest think pieces on social credit to the most recent social credit regulations, Chinese sources express the Party’s hope that the SCS will create a sort of scaffold on which a genuine culture of trust can grow. But none of those sources do a particularly good job of defining what “trust” actually means.

There are as many definitions of trust as there are psychologists and sociologists, but for our purposes here, we think security technologist Bruce Snieder has a good take on the topic in his book Liars and Outliers. Sneider breaks trust down into two distinct types:

When we trust people, we can either trust their intentions or their actions. The first is more intimate. When we say we trust a friend, that trust isn’t tied to any particular thing he’s doing. It’s a general reliance that, whatever the situation, he’ll do the right thing: that he’s trustworthy. We trust the friend’s intentions, and know that his actions will be informed by those intentions.

The second is less intimate, what sociologist Susan Shapiro calls impersonal trust. When we don’t know someone, we don’t know enough about her, or her underlying motivations, to trust her based on character alone. But we can trust her future actions. We can trust that she won’t run red lights, or steal from us, or cheat on tests. We don’t know if she has a secret desire to run red lights or take our money, and we really don’t care if she does. Rather, we know that she is likely to follow most social norms of acceptable behavior because the consequences of breaking these norms are high. You can think of this kind of trust— that people will behave in a trustworthy manner even if they are not inherently trustworthy—more as confidence, and the corresponding trustworthiness as compliance.

In another sense, we’re reducing trust to consistency or predictability.

On the one hand, the idea that the social credit system would artificially increase levels of “intentional trust” comes across as the same kind of naive paternalism that ushered in the Cultural Revolution.

On the other hand, while the SCS may not address the actual underlying social issues, it does have the potential to create a higher level of consistency and predictability in the business environment. In other words, market actors may not have more faith in each other’s intentions, but they can have confidence that others are incentivized to behave honestly.

The SCS is attempting to solve legitimate problems

While criticism of the SCS is warranted, we should also remember that there are legitimate problems that this system is attempting to solve.

China has been raked over the coals for rampant corruption in government, rampant counterfeiting and IP violations, lack of accountability in the business environment, and flagrant disregard for the rule of law for decades. The lack of adherence to regulations and weak enforcement have frustrated the foreign business community as long as they have been operating in the Chinese market. But some of these behaviors are so deeply ingrained in the fabric of society, and are such a “normal” part of business culture, that nothing short of a complete restructuring of social and market values would make a significant difference in the short term.

Well, here it is: the SCS is the Chinese government’s attempt to restructure social and market values in the shortest possible time. And all too often, this effort is being heavily criticized through knee-jerk reactions on the basis of erroneous or misconstrued information.

Perhaps a more productive conversation to have is how China can improve its business environment without simultaneously infringing on the rights and privacy of its citizens.

Feasibility

The integration of future tech is still in the future

Much has been said about social credit’s potential to leverage next-generation technologies to collect and analyse SCS data. But for all China’s lofty ambitions in this area, as it stands, the SCS is actually pretty low-tech. The master database is not yet being populated by a sophisticated network of facial recognition-enabled cameras and data scraping bots, but through plain old database consolidation techniques. Much of the new information is being gathered not by a cutting-edge, could-based AI, but is entered manually or via Excel spreadsheets. Several of the public-facing SCS websites and search tools are buggy and difficult to use.

That’s not to say the system will stay janky forever. There’s plenty of time for upgrading and the integration of fancy technology after all the basic components come online, and there is every indication that the government intends to do so.

In 2015, the State Council released a policy outlining their intentions to use big data and cloud computing in the areas of information gathering and sharing, statistical monitoring, risk forecasting, reporting and complaint mechanisms, corporate solvency projections, tax payments, social security management, traffic management, production safety, quality supervision, product traceability, credit analysis, ecommerce, online fraud, judicial services, natural resources, environmental protection, government staff training, agriculture, health care … the list of where they don’t plan to use it might be shorter. 1

But before we get carried away with visions of facial recognition systems ruining people’s lives for chewing gum on the subway, let’s bear in mind that the people building this thing are bureaucrats. Anyone who’s ever worked on a technical infrastructure project for any government or MNC knows what a catastrophic mess they tend to be. Painting the national SCS as a flawlessly functioning weapon of technocratic state control is, at this stage, giving the project too much credit.

Issues with the system itself

There are a whole lot of blacklists

Not everyone’s happy about the way the blacklist system is shaking out. Chinese academics and journalists have voiced concerns that too many blacklists are being created willy-nilly by too many different organizations, that they’re not appropriately standardized or regulated, and that some of the blacklists are penalizing behavior that isn’t illegal. 23

An interesting example of this happened at a public symposium in April 2019, when Ge Ping’an, deputy director of the Department of Human Resources and Social Security in Zhejiang Province announced plans to use the SCS to punish “malicious, frequent job-hoppers.” 4 The suggestion was widely condemned online, with netizens pointing out that workers’ right to terminate labor contracts are protected by law.

Another possible problem with the sheer volume of blacklists being produced is that it opens the door for too much blacklist overlap, and the possibility of a “pile on” effect where being placed on one blacklist results in a cascade of blacklisting from which it’s difficult or tedious to extract oneself.

If things continue in this vein, the central government will need to step in and better regulate the development of blacklists to ensure they don’t proliferate to an out-of-control extent, and that they are not used to enforce arbitrary rules.

The good news is that the central government is very aware of the potential pitfall here. In an August 2019 interview, NDRC spokesperson Meng Wei outlined the government’s focus on preventing the over-expansion of:5

Blacklist-worthy behaviors

The blacklisting and punishments system

The use of social credit scoring mechanisms

Blacklisting is extra-legal

Other academics have raised issues with the blacklisting system’s relationship to the law.

Some have argued that blacklisting itself is unfair in that it creates a state of double jeopardy, where the violator is penalized legally, and then penalized again for the same offense via the blacklist system.6

Others have pointed out that the SCS is extra-legal, operating in parallel with (but separately from) the justice system, and so there are precious few ways to legally appeal.

We are not lawyers, so we’re not particularly qualified to give a lengthy discourse on the ins and outs of blacklist legality. But if you’re interested in exploring this further, Mariane Von Blomberg’s “Social Credit and the Rule of Law” is an excellent piece on the topic, and is available for free online.

The system focuses on punishments, rather than rewards

The SCS is a very big stick attached to a very small carrot. This is partially because, as we touched on in earlier sections, bureaucracies are optimized to gather data about our violations, not about our good deeds. It’s also partly because the incentives to do exceptionally well are far outweighed by the incentives to simply not screw up too badly. This means that even if the SCS achieves maximum effectiveness as a market regulatory tool, it’s still unlikely to inspire an organic culture of excellence.

There’s always a way to game the system

China has elevated the gaming of government systems into the realm of high art, and it’s unlikely that the SCS will be an exception. If the SCS becomes deeply embedded in society, this very well may give rise to a cottage industry dedicated to the false improvement of credit records. And if the system is built in such a way that it is open to abuse, allowing fraudulent companies to come away with good credit records, it will call into question the entire system’s validity.

The system is designed to stamp out (unsanctioned) corruption…

… but it still leaves plenty of room for corruption. Social credit data is still being entered into the system by human beings. The awards that improve credit records are still meted out by human beings. Safety inspections are still carried out by human beings. At the city level, data on “good deeds” is collected by human beings. The judges that issue legal penalties that get recorded in social credit files are human beings. This is hardly a tamper-proof setup, and there are plenty of places where corruption can creep into the mix.

Takeaways for corporates

The system has a lot of potential upsides for due-diligence

One of the biggest risks of doing business in China is the lack of a reliable, efficient method for vetting suppliers, contractors and potential JV partners. Through the National Enterprise Credit Information Publicity System (NECIPS), foreign corporations will be able to verify that contractors are appropriately licensed, that potential JV partners have not been involved in fraudulent activity, and that key personnel are, in fact, who they say they are.

It also has some upsides for information management

Better connectivity between various Chinese government databases should hopefully mean more convenient bureaucratic procedures. And since the NECIPS allows companies to log in and manage portions of their own credit data, this puts some control back in the hands of businesses.

Stricter enforcement: yay?

Businesses operating in China have long demanded more consistent regulatory enforcement, but that sword cuts both ways.

In theory, better enforcement should create a more predictable business environment.

But it also creates a stricter business environment, which not only raises the cost of ensuring compliance, but also raises costs associated with penalties for non-compliance.

The SCS opens the door to conflicts with international corporate values

The SCS has already been leveraged as a tool to force international companies to adopt Chinese values on politically sensitive issues. As first covered by SCS expert Samantha Hoffman, in 2018, an incident in the airline industry captured international attention when China’s Civil Aviation Administration sent a letter to 44 airlines demanding that they cease listing Taiwan as a separate country on their websites and in other materials, or else the violations would be recorded in their corporate social credit records.

Corporates are more vulnerable overall

We’ve said it several times over the course of this report, but it bears repeating: the Unified Rewards and Punishments framework increases corporate vulnerability many times over. A violation in one area has the potential to affect business operations across the board.

Like it or not, the SCS is coming

Whatever your feelings about the SCS, its implementation is no longer in the realm of theory. It’s here, it’s happening, and it’s likely to have a huge impact on China’s business environment. Any company whose operations extend into the China market must invest in understanding the SCS and its potential to impact on their operations, as well as how to engage with it to minimize risk.

Send us your thoughts

We actively welcome thoughts and feedback from businesses on the ramifications of the SCS in the corporate sphere. If your company has experienced the benefits or inconveniences of the SCS, or you’ve just got something to say about it, we’d love to hear from you. Please send your comments to Kendra Schaefer at ks@triviumchina.com.